James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Institute at Hartford Hartford, Connecticut, USA http://www.ngdc.noaa.gov/paleo/icecore/antarctica/vostok/vostok_data.html CO2 and Industrialization http://www.globalwarmingart.com/wiki/Image:Carbon_Dioxide_400kyr.png 7/12/2016 Stodder, Pollution Permits 3 Surface Temp & Hurricane Intensity Hurricane Intensity --- Sept. Surface Temp __ “Increasing destructiveness of tropical cyclones over the past 30 years”, Nature, 8/4/05, ftp://texmex.mit.edu/pub/emanuel/PAPERS/NATURE03906.pdf 7/12/2016 Stodder, Pollution Permits 4 http://www.columbia.edu/~jeh1/mailings/2012/20120105_PerceptionsAndDice.pdf 7/12/2016 Stodder, Pollution Permits 5 Majority Believes in Global Warming Source: Yale University Project on Climate Change Communication 7/12/2016 Stodder, Pollution Permits 6 Good Old Supply & Demand! 7/12/2016 7 Planning is Perfect – if No Uncertainty! 7/12/2016 Stodder, Pollution Permits 8 But if Costs are Uncertain … 7/12/2016 Stodder, Pollution Permits 9 … Outcome with Quantity Controls 7/12/2016 Stodder, Pollution Permits 10 Losses with Quantity Controls 7/12/2016 Stodder, Pollution Permits 11 Losses with Quantity Controls 7/12/2016 Stodder, Pollution Permits 12 With Cost Controls, further from Equ. 7/12/2016 Stodder, Pollution Permits 13 Greater Losses with Cost Controls 7/12/2016 Stodder, Pollution Permits 14 Steep Decline in Benefits => Quantity Controls 7/12/2016 Weitzman (1973) Stodder, Pollution Permits 15 What if more Gradual Define in Benefits? 7/12/2016 Stodder, Pollution Permits 16 Quantity or Cost Controls? 7/12/2016 Stodder, Pollution Permits 17 Cost Controls Closer to Equilibrium 7/12/2016 Stodder, Pollution Permits 18 Quantity Controls Further from Equilibrium 7/12/2016 Stodder, Pollution Permits 19 Costs more steeply sloped than Benefits => Cost Controls 7/12/2016 20 Best Method is an Empirical Question: If Social Benefits are Less Price Sensitive (More Steeply Sloped) than Costs => Use Quantity Controls (Pollution Permits). 7/12/2016 Stodder, Pollution Permits 21 Benefits more steeply sloped than Costs => Quantity Controls Prices vs. QuantitiesStodder, Revisited: www.rff.org/documents/RFF-DP-98-02.pdf Pollution Permits 7/12/2016 22 If Social Benefits are More Price Sensitive (Less Steeply Sloped) than Costs => Use Cost Controls (Taxes / Subsidies). Prices vs. Quantities Revisited: www.rff.org/documents/RFF-DP-98-02.pdf 7/12/2016 Stodder, Pollution Permits 23 Costs more steeply sloped than Benefits => Cost Controls Prices vs. QuantitiesStodder, Revisited: www.rff.org/documents/RFF-DP-98-02.pdf Pollution Permits 7/12/2016 24 Volatility of S02 Prices, US: 1995-2006 William Nordhaus (Copenhagen, 2009) 7/12/2016 Stodder, Pollution Permits 25 Basic Business Argument: What is more important for your Business? • Stability in the future price of energy that your business must pay? or … • Stability in the future quantity of energy that your business must use? 7/12/2016 Stodder, Pollution Permits 26 Additional Arguments: • Carbon taxes will make the cost of carbonbased energy higher, but also more stable. • Taxes on energy are already in place. Pollution Permits would require new levels of bureaucracy. • Much easier to tax oil at the refinery than check pollution permits at the tail pipe or smokestack. • Carbon tax applies to all users, while permits are monitored for just the biggest polluters. 7/12/2016 Stodder, Pollution Permits 27 Government Borrowing still Cheap! http://research.stlouisfed.org/fred2/graph/?g=rzb 7/12/2016 28